Manitowoc Company's Management Suggests a Choppy 2015

What a terrible start to the year for Manitowoc investors. The stock has crashed 17% in January as of this writing, but the worst may not be over yet. With its 2014financial year drawing to a close, Manitowoc expects its full-year crane revenue to slip at a "mid-to-high single-digit percentage." Worse yet, management doesn't sound optimistic about the near future.

In fact, several things that Manitowoc management said during its most recent earnings call in October suggest painful times ahead. Here are three such factors you should be aware of.

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Oil price: A massive challenge

"We continue to be faced with a challenging demand environment globally, driven by uncertainty across our end markets and a general lack of customer confidence, particularly in cranes."

That's how Manitowoc's CEO, Glen E. Tellock, put things into perspective during the conference call. A strong U.S. construction market is considered a key growth driver for the company, but the optimism has yet to be reflected in its numbers -- Manitowoc's crane sales slipped 9% during the nine months through September 2014. Weak demand for off-road crane products is to blame.

Unfortunately, things are getting uglier by the day. With the oil-price plunge forcing energy companies to shelve growth plans, sales for Manitowoc's rough-terrain cranes, primarily used in petrochemical plants and refineries, could fall off a cliff. That's going to weigh heavily on the company's top line since energy ranks among its primary crane end markets.

It gets scarier when you realize that Manitowoc is battling headwinds in nearly every major market.

Banking on one market for growth?

During Manitowoc's earnings call, here's how Tellock responded when asked which geographic region could drive crane orders for the company in 2015: "It's probably going to be North America. I think there could be some in Latin America, but I think the Middle East is still OK."He further elaborated: "You look at the rest of the geographies around the world, whether it's Europe, I think is flattish. I think China stays flattish."

In short, Manitowoc is pinning hopes on the North American market -- which accounts for nearly half of its crane revenue -- to drive sales this year. That sounds dubious, considering the challenge oil prices pose. And there's little to expect from other markets, especially with Europe, Latin America, and China hitting roadblocks.

China, in particular, was perceived as a major growth market for construction-equipment makers before the economy wobbled. The prolonged slowdown has forced Manitowoc to take grave steps: Over the past year and a half, the company exited its joint venture with China-based Shantui Investment, while offloading stake in another. Meanwhile, the crisis in Europe is far from over, and the IMF projects Latin America to grow at only about 2.2% this year.

It's no surprise, then, that Manitowoc has turned attention to cost-cutting to maintain margins even as revenue fails to grow. But it looks like the company's efforts are falling short.

Slashing costs, but...

Management placed great emphasis on its ongoing cost-cutting efforts during the conference call. CFO Carl J. Laurino even gave out some numbers for the third quarter: "We generated excellent results in terms of our cost savings initiatives, which resulted in over $12 million of product cost benefits, nearly $7 million of lower interest expense and approximately $26 million of tax savings."

Sounds great, but wait: Those tax savings were a one-time benefit only. That aside, it's true that Manitowoc has initiated several moves in recent months, including consolidation of facilities and layoffs. But the results have yet to show up -- Manitowoc's operating earnings for the nine months through September declined 13% year over year.

...there's more to do

What's worrisome is that Manitowoc is a heavily indebted company, with long-term debt worth nearly $1.7 billion as of the end of September 2014. For the load, the company earned just about $230 million in operating earnings during the nine months ended September last year, while generating only $35 million of free cash flow over the past 12 months.

It's good to see that Manitowoc's interest expense declined roughly $28 million over the nine months through September 2014. But the company isn't really repaying its debt. Instead, it's refinancing major portions, which is why its long-term debt increasedby about $170 million between December 2013 and September 2014.

So, isn't it time Manitowoc offloaded some of its debt? With challenges aplenty, it's clear the company's earnings will be under pressure. In such a situation, heavy debt and interest outgo not only constrict Manitowoc's growth options, but also limit shareholder returns. For perspective, Manitowoc last treated shareholders to a dividend increase in 2010, and the stock's current dividend yield is a minuscule 0.4%.

It's clear 2015 will be hard on Manitowoc, but the company needs to get its act together and convince investors of its prospects before they start losing patience.